European Commissioner for Internal Market and
Moving forward on Capital Market Integration
Federation of European Stock Exchanges (FESE) Convention 2007
Brussels, 26 June 2007
Ladies and Gentlemen,
Much has happened since the last FESE Convention. In one year, the European and global trading landscape has undergone some dramatic change.
We have witnessed the first transatlantic marriage of stock exchanges. Maybe more in the coming months. In addition, a number of new players seem ready to enter the market and to try to grab a piece of the pie from incumbent exchanges.
The tectonic shifts we are witnessing in Europe have many causes; Globalisation for sure; technology; but part of these changes can be also attributed to the EU regulatory environment. For instance, it is no secret that part of the attractiveness of European stock exchanges to US suitors lies in the principles-based approach we apply in Europe to regulation. We have followed "better regulation"; policy-making relying on extensive consultations with stakeholders, on impact assessments; on building consensus with our Member States and the European Parliament.
Of course, European exchanges have their own interest in finding strong global partners. This will allow them, among other things, to broaden their investor base and scale up in the wake of coming competition from alternative trading platforms.
Ladies and Gentlemen, this morning I would like to focus on recent developments in the area of post trading and MiFID implementation.
What do they mean for European exchanges?
Our goal is clear: to have more competition in the trading space. By trading – I include clearing and settlement. Competition is a healthy and welcome thing. It encourages efficiency and innovation. It brings substantial benefits for investors and the economy as a whole. In this new environment, the winners will be those who see MiFID and the Code of Conduct as a strategic opportunity and not just a compliance issue. Those who will fail to adapt and prepare themselves for greater competition will lose.
To establish such an environment, it is important that there are no delays to the implementation of MiFID. As you all know, things are not going perfectly in this area. I have personally written to finance ministers, urging them to put MiFID implementation on top of their agenda. I take this opportunity to encourage you, the industry, to do the same. Time is running out. Everything must be ready before the November 1st deadline. Those who are not ready risk damaging their own firms (who will not have a new passport). Yet business will flow into their jurisdictions and cannot be impeded.
True competition in trading requires that market participants have a real possibility to choose the post-trading infrastructure they want to use. In part, this freedom is already granted by MiFID. However, the exercise of this freedom depends on the pre-existence of links between market infrastructures. And here is where the Code of Conduct comes in.
The ultimate aim of the Code is to make the user choices enshrined by MiFID not a theoretical possibility but a reality. The Code does so by providing users with further price and service related information. By cementing opportunities for service providers to gain access to and become interoperable with infrastructures in foreign markets. By giving users an effective choice as regards the services they buy from different infrastructure providers.
In short, it aims at introducing real competition in the market for post-trading services without prescribing what structure the industry should adopt. The latter decision is for market forces to decide.
So is the Code working?
The Code has already delivered some very tangible results, in particular in the area of price transparency. The latest scoreboard shows that across the spectrum the results are very encouraging with close to 80% overall compliance on discount schemes and the provision of examples and nearly 100% on fees. On rebates some more work remains to be done but the lion's share of the task has been satisfactorily completed on this leg of the Code's implementation. Achieving the same results with a directive would have taken many years. The signatories should be applauded for their efforts so far. However, they cannot rest on their laurels. Many difficult tasks still lie ahead of them.
The Commission expects the signatories to deliver the “heart” of the Code – the detailed guidelines for establishing access and interoperability between market infrastructures – by the end of this week. My Services have already met several times with representatives of both infrastructures and users and tell me that the work on access and interoperability, while difficult, is advancing. And my sense is that because of the complexities involved, progressive refinement may be necessary. Initial judgement on the guidelines will be given at the meeting of the Monitoring Group on 11 July. We shall be attentive to the overall balance, the clarity of obligations and the respect of commitments.
The Commission will be very attentive, for example to how the signatories will interpret the business case for interoperability. We have already signalled to them that we will not accept any anti-competitive interpretation or application.
Let me be clear: the Commission will also be there to lend a hand to all the parties involved, whenever they deem it necessary.
However, the Commission can only do so much. A lot will have to be done by the users and the market infrastructures. Once the guidelines are ready, I expect the infrastructures and market participants to actively start using the possibilities that these offer, and the users to ask for links to be established. Commissioner Kroes and I want to hear immediately if there is any anticompetitive behaviour or unsavoury practices. I repeat: immediately. It goes without saying that we expect all signatories to abide by the final outcome and apply the principles to the letter.
Market infrastructures have pointed out that the existence of Giovannini barriers may hamper the establishment of links or, at the very least, limit the benefits stemming from the latter. While existing examples prove that functioning links are possible even in an environment where these barriers have not been fully eliminated, I do agree on the importance attributed to the elimination of the Giovannini barriers, or any other barriers that in the course of examining the possibilities offered by the Code have been identified by market participants. And we will be asking Member States to publish the terms and conditions for operating in their market: To the extent that individual Member States have terms and conditions or legal provisions that constitute obstacles to -or create unfair bias against - providers of clearing and settlement from outside that Member State - possibly even over and above those identified previously by Giovannini - the Commission will demand that those obstacles or biases be rapidly dismantled.
Progress on eliminating the Giovannini barriers has proceeded less quickly than we would like. However, that does not mean that there is no progress. On the contrary, quite a lot has been done since the start of the process.
For the private sector barriers in particular, progress is quite encouraging. The standard-setting process is well under way: solutions to some of the barriers are already available. Now it is important that they are adopted by the industry as soon as possible.
It is true that things do not seem to be proceeding for public sector barriers as quickly as is the case for the private sector, but things are not always as they seem; important and necessary work is proceeding.
On the fiscal barriers the FISCO group of experts is about to present its second report which will give concrete proposals on how to remove the barriers.
On the legal barriers, which are one of the most complicated and sensitive ones, progress is visible both within the EU, through the preparatory work conducted by the Commission's Legal Certainty Group, and worldwide, through the international negotiations for the adoption of a Convention on substantial law on intermediated securities under the auspices of UNIDROIT.
Here I would once again stress the important role that the industry can play in this respect. Once the solutions are out, you should strongly encourage your respective governments to adopt them as quickly as possible.
We welcome your opinions on the proposed solutions. And come and join us at the FISCO conference on the 23rd of October here in Brussels.
We are also contemplating amendments to the Financial Collateral Directive and the Settlement Finality Directive, to incorporate credit claims in the pool of eligible collateral. This would align the two directives with the current practice of central banks of using such assets as collateral.
The Commission is not alone in its battle to improve efficiency in the securities markets. The ECB has launched T2S which I regard as a very important initiative in the area of post-trading, I broadly support it. As long as T2S complies with competition law, and remains open to non-euro countries and currencies other than the euro. And as long as T2S has in place an inclusive and transparent governance structure.
T2S is a long term project – it is likely to be 2013 before its benefits materialise. That is another reason to press on now with the code and drive out inefficiency.
Two final things on post-trading. We request all players to help our price monitoring study – so as to ascertain that we are making progress. Of course, taking out much of the cost will be contingent on action also in dismantling the remaining Giovannini barriers. That's why the pressure must be kept up, not just in getting the Code implemented, but also in getting Member States to move on Giovannini.
Let me now turn to MiFID. Can its effects already be seen? The answer is Yes.
We shall assess the impact of the MiFID rules carefully but it is already clear that it is having a big impact on the future shape of our markets. The consolidation of exchanges; the creation of new platforms; new trade reporting mechanisms.
One other issue to which I wish to make reference is the availability for use of real time data from exchanges. It is important that market positions in respect of the supply of this data are not abused and that real time data needed to fulfil the requirements of MIFID is made available at reasonable cost to data customers and vendors, given that one of the main purposes of the MiFID is to bring down overall transaction costs.
For us, ensuring timely and convergent implementation of the MIFID is the biggest challenge now. I hope that our securities regulators will find sensible, cost-effective solutions on the outstanding issues, including one which is important for FESE and its members: the identification of derivative instruments for the purpose of transaction reporting. The aim should be to find workable, cost-effective solutions.
As I said earlier, the EU with its principles-based regulatory regime has become more attractive for the financial industry and investors worldwide. Deeper integration is happening. However, closer integration is putting pressure on the current system of financial markets regulation as territoriality of legislation and supervision does not fit well with global and de-materialized capital markets. This is why the European Commission intends to engage in a trans-Atlantic dialogue with all actors concerned to deliver an adequate framework for our industry. The buzzwords are transatlantic mutual recognition for securities regulation...something I broadly favour politically and economically.
The tie-up between NYSE and Euronext and NASDAQ and OMX has made us more aware of the need to find workable solutions for players active on both sides of the Ocean to avoid regulatory and supervisory overlaps and to ensure certainty of law and transatlantic market access rights. We need to discuss in our Financial Markets Regulatory Dialogue with the SEC and agree the basic framework for mutual recognition of each other's rulebooks and supervisory and enforcement practices.
In my view, rulebooks should be assessed on agreed, equal and transparent criteria to determine whether they are substantially comparable. Such criteria would be used to assess rulebooks, enforcement and market access practices. What is important from our perspective is that we maintain our high standards of investor protection, our principles-based regulatory approach and preserve the coherence of the Single Market. In the EU, EU rules apply, not those of a third country. There should be no cherry-picking. Brokers and exchanges from any jurisdiction meeting the agreed criteria should be given access and there should be full reciprocity.
Furthermore, regulatory co-operation should not necessarily mean uniform rules – healthy regulatory competition shouldn't be excluded where it makes sense. We need to be pragmatic in dismantling barriers to transatlantic business. Others will surely follow with other jurisdictions such as Japan, China, India or Hong Kong.
But to progress we need to be clear about the objectives; the level of ambition; the process must be right; and we must be clear legally on competences and accountability.
Chairman, let me conclude by wishing you a successful tenancy of FESE – you will not be short of work. FESE is at the heart of many of the major European financial services questions of the day. And if I may say so, FESE's heart, Judith Hardt, has done an outstanding job as your Secretary General and industry leader on the Code of Conduct.